retirement account question?
I have been thinking about this recently. I know that 401k plans and iras are tax deferred which would help if i was in a lower tax bracket at retirement than I would be now. I am 23 years old and plan on contributing a lot of money to these plans until i retire. assuming i have something like 1.5 million in retirement funds by that time, wont i be making a large yearly income? say i made 10 percent one year, thats 150,000 dollars in income. wont my tax bracket be just as high with that kind of investment income?
Public Comments
- yes, but remember, when you retire, the tax brackets will be adjusted...you are basing money 30 years from now on 2007 tax brackets...
- No one knows what the tax brackets will be in the future, but your $150,000 has to be inflation-adjusted -- it will probably be worth less than $15,000 in today's dollars -- so, relatively speaking, your tax bracket would not be high. If that seems far-fetched, remember people were living on $10,000/year in 1960 and doing okay.
- On the other hand, Roth IRA contributions are taxed at your current rate and are tax exempt upon withdrawal at retirement. You may want to first contribute the maximum, $4000 per year (2007), to a Roth IrRA and not have to worry about taxes again on that account.
- Currently, the tax brackets are adjusted for inflation each year. So 40 years from now, it will take many more dollars to reach your current tax bracket than it now takes. However, predicting where tax brackets will be 40 years from now isn't worth a lot of effort, because there's no way to know for sure where they'll be. Political considerations could change the tax laws a lot by then. It's good that you're thinking now about saving for retirement. The best thing to do is save early, often and regularly. Use retirement accounts, especially a 401(k) if it's available and has an employer match. If you make a habit of saving and investing as much as you can, you'll have done the best you could.
